Myanmar Will Unleash Its Currency

By

Alex Frangos And

Patrick Barta

Updated March 28, 2012 12:58 pm ET

Myanmar said it would float its currency, effective April 1, enacting a long-sought policy reform that is expected to make the resource-rich Southeast Asian country more inviting to foreign investors following decades of pariah-nation status.

The move is one of the biggest reforms to date as Myanmar's government seeks to re-engage with the outside world and get out from under the weight of tough Western sanctions. The country's current foreign-exchange system, which involves a fixed "official" exchange rate that's more than 100 times as valuable against the dollar as the country's black-market rate, is so confusing that many foreign companies have refused to re-enter the country even if Western leaders ease sanctions against Myanmar as expected later this year.

Cashiers sorted piles of kyat banknotes in a private bank in Yangon in July 2011.
Reuters

The idea is to unify the country's multiple exchange rates so that businesses and the government can more easily handle accounting and convert money.

The step faces several pitfalls, though, and could have unintended consequences, including an unstable exchange rate or a strengthening currency that hobbles the country's nascent export sector at a time when the country is just re-entering the global economy. It could also prove too difficult to implement in a country that has little technical expertise in handling complex financial reforms.

Myanmar officials wanted to move more quickly on the currency than International Monetary Fund advisers suggested, according to people familiar with the process. Myanmar has brought in experts from the Malaysian and Thailand central banks to help with the transition. IMF officials familiar with the Myanmar situation couldn't be reached.

Details of the change—announced Wednesday in the official New Light of Myanmar newspaper—remain unclear, including the exact value of the Myanmar kyat when it is floated Sunday, which is also the day of a key parliamentary by-election contested by famed dissident Aung San Suu Kyi. It is also unclear when, or if, foreigners will be able to trade the currency in significant sums. Bankers and officials familiar with the reform have said in recent weeks that the kyat will likely be set between 800 kyat and 820 kyat to the dollar, which is close to the prevailing unofficial street rate.

The government announcement said simply that the kyat will "from now on be determined by supply and demand" via a "managed" float, and that the government would "gradually eliminate restrictions on current international payments and transfers abroad."

"I think it will be difficult for them to control the currency," said Anthony Nafte, a senior economist at CLSA Asia-Pacific Markets in Hong Kong. Among the risks, he said, was that the kyat would keep increasing in value as more foreign dollars rush in to take advantage of business opportunities there, hurting exports.

The reform marks the latest twist for a currency that already has one of the strangest histories in Asia. In past years, the government several times imposed surprise demonetizations of the currency, rendering some notes worthless and wiping out people's savings. In the 1980s, under former dictator Ne Win, new money was printed with odd denominations such as 45 kyat and 90 kyat notes, reflecting the general's numerological preferences.

Even when officials weren't monkeying with the kyat, its value tended to decline rapidly in unofficial street trading as the government printed money to pay bills, stoking inflation. The official supply of money in circulation, a state secret since 1997, was recently disclosed in parliament, where it was revealed that it has increased 1,400% in that time.

The system of having multiple exchange rates goes back many years, and was imposed at a time when the government wanted to exert more control over the economy amid an unsuccessful bid to introduce socialist policies. The official rate settled at about six kyat to the dollar, but many businesses continued operating at the unofficial rates that in recent years have been closer to 800 kyat to the dollar.

Economists say the government stuck with the system because it allowed officials to muddle the country's accounting and effectively keep two sets of books, making it easier hide to revenues that could be diverted to other needs, such as military hardware, and to line the pockets of officials. Myanmar officials denied doing so.

The system has become increasingly untenable over the past year as Myanmar has embarked on economic reforms aimed at attracting more foreign capital and modernizing its economy, which still doesn't widely use ATMs or credit cards. Since the military handed power to a parliamentary government last year, Myanmar has released hundreds of political prisoners, legalized its main opposition party and loosened restrictions on the media. Western governments have said they might ease key sanctions against Myanmar if Sunday's election is free and fair.

"Unification of the exchange rate is very important. Otherwise the black market is greater than the white market," Myanmar presidential political adviser Nay Zin Latt said in a recent interview in Yangon. Government officials have said they pursued the currency unification partly so the government's fiscal budget, which also starts April 1, could be accounted for with the more realistic street rates.

Myanmar's business community remains nervous about the move, especially if the kyat increases in value. The currency's unofficial rate has already strengthened against the dollar over the past two years as exports of rice, beans and energy have increased, while restrictions on imports prevented the need to send dollars abroad.

"Even now we cannot breathe" with the currency set at around the 800 kyat-to-the-dollar level, says Khine Khine Nwe, deputy managing director of garment makers Best Industrial Co. Ltd. and executive council member of the Myanmar Garment Manufacturers Association. The garment industry is hoping a potential relaxation of U.S. sanctions will revive factories there, but a strengthening currency will make it more difficult to compete on cost.

There are also concerns that businesses or investors could seek to manipulate the currency, though the odds of that for now appear low. The country currently has no electronic market for the kyat. Banks inside the country were only recently permitted to exchange kyat for dollars, but are limited to transactions of less than $2,000, according to local businessmen.

The lack of a developed financial market has the flipside of making it difficult for the central bank to inject or withdraw kyat liquidity or to intervene in the dollar market, as most of it occurs with back-alley money changers. The small size of the economy means a modest inflow of cash could destabilize the kyat and pose a challenge for the central bank to respond.

"Inject $10 million and it would destabilize," says a Yangon economist who is familiar with the transition to a unified currency.

Also at issue is the size and readiness of the central bank's firepower in managing the currency: its stock of dollars. Economists at the Asian Development Bank and elsewhere estimate Myanmar has between $2 billion and $7 billion in foreign exchange reserves—compared with more than $180 billion in neighboring Thailand, according to the ADB. Mr. Nay Zin Latt says the country's reserves are "in the billions" of dollars, up from "only a few million" in 1988.

The Yangon economist familiar with the reform says not all of the reserves are at the central bank. Most of the money is sitting with the finance ministry and a state-owned export bank, and the money will need to be pooled to be an effective bulwark against speculators, the economist said.

"If there's no speculative attack, we should be OK," the economist said.

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Myanmar Will Unleash Its Currency

Myanmar said it would float its currency, effective April 1, enacting a long-sought policy reform that is expected to make the resource-rich Southeast Asian country more inviting to foreign investors following decades of pariah-nation status.